De-Risking

Caribbean Country Department

Allan Wright

POLICY BRIEF N
IDB-PB-257

November 2016

De-Risking

Allan Wright

November 2016

Cataloging-in-Publication data provided by the

Inter-American Development Bank
Felipe Herrera Library
Wright, Allan.
De-risking / Allan Wright.
p. cm. (IDB Policy Brief ; 257)
Includes bibliographic references.
1. Financial risk. 2. Financial institutions. 3. Correspondent banks. 4. Money
laundering-Prevention. I. Inter-American Development Bank. Country Department
Caribbean Group. II. Title. III. Series.
IDB-PB-257

http://www.iadb.org
Copyright 2016 Inter-American Development Bank. This work is licensed under a Creative Commons IGO 3.0 AttributionNonCommercial-NoDerivatives (CC-IGO BY-NC-ND 3.0 IGO) license (http://creativecommons.org/licenses/by-nc-nd/3.0/igo/
legalcode) and may be reproduced with attribution to the IDB and for any non-commercial purpose. No derivative work is allowed.
Any dispute related to the use of the works of the IDB that cannot be settled amicably shall be submitted to arbitration pursuant to
the UNCITRAL rules. The use of the IDB's name for any purpose other than for attribution, and the use of IDB's logo shall be
subject to a separate written license agreement between the IDB and the user and is not authorized as part of this CC-IGO license.
Note that link provided above includes additional terms and conditions of the license.
The opinions expressed in this publication are those of the authors and do not necessarily reflect the views of the Inter-American
Development Bank, its Board of Directors, or the countries they represent.

CET@iadb.org
Allan Wright: allanw@iadb.org

Abstract
It is essential to have secure, stable monetary and worldwide payment
frameworks that reduce exposure to Money Laundering and Terrorism Financing
(ML/FT), while permitting access to markets and customers from vulnerable
economies that are seen as high risk.
To accomplish this, all partners, including governments, national regulators,
multilaterals, and worldwide banks, must help national respondent banks in
building up their risk and compliance structures, enhancing training for front-line
officers, and upgrading current back office frameworks. This will assist them to
maintain existing connections between global banks and their local respondents.
JEL codes: G20, G21, G28
Keywords: De-risking, financial systems, jurisdictions, correspondent banks,
international banks, money laundering

What is the Issue?

The Financial Action Task Force (FATF) defines de-risking as the phenomenon of financial
institutions terminating or restricting business relationships with clients or categories of clients to
avoid, rather than manage, risk in line with the risk-based approach. At this point, it is not
entirely clear if customers are being de-risked to prevent money laundering and the financing of
terrorism (AML/CFT) and the proceeds from nefarious activities to have access to financial
systems, or if legitimate clients, transactions, and jurisdictions that are perceived as high risk or
unprofitable are simply being kept out of global financial and payment systems (World Bank,
2016).
Whatever the underlying motives, there is a perfect understanding that de-risking
involves the termination or restriction of financial services, limiting access by countries
conducting business across borders with the support of a financial system that allows money to
move efficiently and securely. Today, a broad cross-section of international transactions,
including settlements on credit cards, foreign direct investments, remittances, and external
flows, are encouraged through connections between global banks and national respondent
banks. (World Bank 2016).
Caribbean countries development and improvement are subject to the continued access
to global exchanges. For small, open economies which depend on global financial transactions,
payment settlements, and tourism, any threat to the financial and payment system could have a
destabilizing impact.
A World Bank report issued in November 2015 found that the Caribbean region has
been among the most severely affected by this de-risking strategy. International correspondent
banking has either been terminated or restricted to several domestic respondent banks in recent
years. Banks, building societies, offshore businesses, and other financial institutions in the
Caribbean have been impacted. In fact, de-risking within the Caribbean is not only the result of
real or perceived AML/CFT issues within individual institutions; international correspondent
banks are also making decisions about their relationships within the context of the overall
perception of the region as being either high risk or unrewarding. Thus, in an area where there
is a large volume of legitimate transactions, such as remittances and offshore financial services,
the perception of risk leads to enhanced due diligence, which in turn drives up costs.
From this standpoint, the decisions by global banks to end or limit correspondent
banking can appear to be reasonable. As the cost of compliance rises, together with the real
possibility of penalties and sanctions, certain jurisdictions, business lines, and clientele are less
palatable, or in some cases, no longer feasible.
2

This exceptionally vexing issue will not be solved quickly. Nevertheless, the expectation
of this brief is to examine some concrete steps that stakeholders can take individually or
collectively to create a growing sense of certainty that we are heading in the right direction.
What, then, are the forward-leaning solutions that will help to alleviate these problems,
with the hope that global banks and respondent banks can proceed with their relationship and
maintain financial and payments frameworks throughout the region?
The Need for Open Dialogue
There is a need for open dialogue between the key stakeholders that contribute to the goal of
sustainable and inclusive banking. Any dialogue must be solution-oriented, which will help to
balance risk, compliance, and cost.
Discussions must outline the context and challenges for stakeholders, and explore ways
in which regional economies could enhance their compliance standards and improve
communications to their local and international partners regarding their ongoing efforts to create
a robust supervisory regime. Critical to the dialogue is the need for clarity on regulatory
expectations and the rationale for terminations, restrictions, and sanctions. Respondent banks
must also express their willingness to provide as much information as possible on their
structures for relieving AML/CFT dangers. The CARICOM Heads of Government, understanding
the gravity of this matter, have given it the highest priority. There have been greater efforts of
advocacy and dialogue at different fora, including meetings of the Financial Stability Board, the
International Monetary Fund, the World Bank, the U.S. Department of the Treasury, and the
Inter-American Development Bank. (World Bank 2016, Wright et al. 2016).
The Role of Governments and National Regulators
When jurisdictions are considered too high-risk, governments and federal regulators can seek
out new and creative ways to provide and maintain financial services, using due diligence
utilities and accommodating the most extensive accessibility of shared client data among global
and regional banks through the development of a centralized utility for monitoring, and sharing
when necessary, transactional information. Mexico has demonstrated the usage of a centralized
database of cross-border transactions accessible by correspondent banks.
National regulators should enhance efforts to show that they are comprehensively
regulating perceived high-risk entities and business lines and provide open affirmation of their
exercises to increase the comfort level of international banks (World Bank, 2016).

Increase Focus on Technical Tools

There should be emphasis on the practical tools that can help maintain current correspondent
relationships and that can build and improve compliance structures. This would include greater
usage of know your customer (KYC) utilities and legal entity identifiers (LEIs), allowing global
banks timely access to client data and proving further guarantee that KYC requirements are
being met. Most financial technology (fintech) companies, such as the Society for Worldwide
Interbank Financial Telecommunication (SWIFT) and International Business Machines (IBM),
can use block-chain technology and other measures (artificial intelligence and machine
learning) to improve the reliability of client information and spotting suspicious transactions for
correspondent and respondent banks, thereby reducing money laundering and terrorist
financing (ML/TF) risks. (World Bank 2016).
Providing more Efficient Training, Creating more Transparent Compliance Guidelines
By helping nations enhance their AML regimes or supervision and regulation guidelines within
the financial sector, international organizations and technical assistance providers will contribute
to addressing ML/TF concerns, increase attractiveness of correspondent banking, and create
common advantages for all stakeholders. Several multilateral (Inter-American Development
Bank, International Monetary Fund, and World Bank) and some regional (Caribbean
Development Bank) agencies stand ready to assist local jurisdictions and respondent banks,
especially domestic banks, which have been severally impacted.
Conclusion
It is important to have secure, stable financial and global payment systems that reduce
exposure to the ML/FT but allow access to jurisdictions and clients from small, open economies
that are viewed as high-risk.
To help achieve this, all stakeholders, including governments, regional regulators,
multilateral agencies, and global banks, must assist national respondent banks in developing
their regulatory frameworks, improving training for regulatory compliance officers, and
enhancing current back office systems. This will help them to maintain existing relationships
between international banks and their local respondents.
Increased efforts are needed to advocate for improving the clarity of regulatory
standards. They need to be applied consistently across the financial sphere, and global banks
must be encouraged to apply due diligence even as they attempt to reduce their risk profile and
protect their brand.
4

A great deal is at stake, including the continued viability of our local banking
relationships and financial sector. All stakeholders, therefore, must continue to work in alliance
with regional and international initiatives in dealing with this multifaceted, intriguing issue of derisking and prevent a rupture of banking relationships.

References
Financial Action Task Force. 2015. FATF takes action to tackle de-risking. Paris, France:
Financial Action Task Force.
World Bank. 2015. Withdrawal from Correspondent Banking: Where, Why and What to Do
About It. Washington, DC: World Bank.
_____. 2016. Stakeholder Dialogue, Findings and Recommendations. Washington, DC: World
Bank.
Wright et al. 2016. De-Risking and its Impact: The Caribbean Perspective. Trinidad and
Tobago: Caribbean Centre for Money & Finance.